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Food inflation at year-high
Published on 6 Jan. 2011 11:38 PM IST
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India’s food inflation accelerated for the fifth straight week to the highest in more than a year, reinforcing fears it will spill over to broader prices and pile pressure on the central bank to tighten monetary policy.
Unseasonal rains have pushed up prices of vegetables such as onions and tomatoes in recent weeks, and the authorities are bracing to live with elevated price levels in the near term. Onion prices increased by over 23% over the week. The food price index rose 18.32% in the year to December 25 and the fuel price index climbed 11.63%. This compared with 14.44% and 11.63% respectively in the previous week.
“This number reinforces the base case scenario of a 50 basis point rate hike in January. One has to be prepared now for a much larger frontloaded rate hike series than what one was expecting say a month ago and therefore the entire swap curve should shift upwards,” said Hitendra Dave, Head of Global Markets, HSBC India, Mumbai.
Indian swap rates and bond yields rose after the larger-than-expected rise, cementing expectations for further rate hikes by the central bank in the upcoming January.
The 5-year swap rate rose 5 basis points to 7.80% while the 1-year swap rate was up 4 basis points at 7.06%, dealer said.
India’s central bank, which had raised interest rates six times in 2010, is expected to increase rates by at least 25 basis points on January 25 when it reviews policy, a Reuters poll showed on Wednesday.
Analysts forecast rates to rise by 75 basis points in 2011. C. Rangarajan, chairman of the prime minister’s economic advisory council, said on Wednesday more action on interest rates may be needed from the central bank if inflation remains sticky.
Food articles have a weight of 14.34% in the wholesale price index, India’s most widely watched gauge of inflation, and the spurt in vegetable prices is expected to show up in the headline number when December data is released on January 14.
Headline inflation had eased to a 12-month-low of 7.48% in November after hitting 8.58% in October. The central bank has said it would revise at the January 25 policy its end-March target of 5.5%.
The finance ministry’s chief economic adviser, Kaushik Basu, has said monetary and fiscal policy measures may not be adequate to tackle sector specific price rises and the country would have to live with such price rises. The government will not increase diesel prices for now, the oil minister signalled on Wednesday, as the government walks a tightrope between reducing the burden of subsidies and tackling public anger over inflation.

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